Question

Risks are part and parcel of investing. Propose methods generally used to manage risk by any potential investor.

Answer 1

Risk iis idefined iin ifinancial iterms ias ithe ichance ithat ian ioutcome ior iinvestment's iactual igains iwill idiffer ifrom ian iexpected ioutcome ior ireturn. iRisk iincludes ithe ipossibility iof ilosing isome ior iall iof ian ioriginal iinvestment.

Everyone iis iexposed ito isome itype iof irisk ievery iday i– iwhether iit’s ifrom idriving, iwalking idown ithe istreet, iinvesting, icapital iplanning, ior isomething ielse.

A ifundamental iidea iin ifinance iis ithe irelationship ibetween irisk iand ireturn. iA icorporation iis imuch imore ilikely ito igo ibankrupt ithan ithe iU.S. igovernment..

If iand iwhen ia irisk ibecomes ia ireality, ia iwell-prepared ibusiness ican iminimize ithe iimpact ion iearnings, ilost itime iand iproductivity, iand inegative iimpact ion icustomers. iFor istartups iand iestablished ibusinesses, ithe iability ito iidentify irisks iis ia ikey ipart iof istrategic ibusiness iplanning. iRisks iare iidentified ithrough ia inumber iof iways...

1. Physical iRisks

Building irisks iare ithe imost icommon itype iof iphysical irisk. iThink ifires ior iexplosions. iTo imanage ibuilding irisk, iand ithe irisk ito iemployees, iit iis iimportant ithat iorganizations ido ithe ifollowing:

Make isure iall iemployees iknow ithe iexact istreet iaddress iof ithe ibuilding ito igive ito ia i911 ioperator iin icase iof iemergency.

Make isure iall iemployees iknow ithe ilocation iof iall iexits.

Install ifire ialarms iand ismoke idetectors.

Install ia isprinkler isystem ito iprovide iadditional iprotection ito ithe iphysical iplant, iequipment, idocuments iand, iof icourse, ipersonnel.

Inform iall iemployees ithat iin ithe ievent iof iemergency itheir ipersonal isafety itakes ipriority iover ieverything ielse.

Hazardous imaterial irisk iis ipresent iwhere ispills ior iaccidents iare ipossible. iThe irisk ifrom ihazardous imaterials ican iinclude:

· Acid

· Gas

· Toxic ifumes

· Toxic idust ior ifilings

· Poisonous iliquids ior iwaste

Fire idepartment ihazardous imaterial iunits iare iprepared ito ihandle ithese itypes iof idisasters. iPeople iwho iwork iwith ithese imaterials, ihowever, ishould ibe iproperly iequipped iand itrained ito ihandle ithem isafely.

Organizations ishould icreate ia iplan ito ihandle ithe iimmediate ieffects iof ithese irisks. iGovernment iagencies iand ilocal ifire idepartments iprovide iinformation ito iprevent ithese iaccidents. iSuch iagencies ican ialso iprovide iadvice ion ihow ito icontrol ithem iand iminimize itheir idamage iif ithey ioccur.

2. Location iRisks

Among ithe ilocation ihazards ifacing ia ibusiness iare inearby ifires, istorm idamage, ifloods, ihurricanes ior itornados, iearthquakes iand iother inatural idisasters. iIndividuals ishould ikeep isufficient ifuel iin itheir ivehicles ito idrive iout iof iand iaway ifrom ithe iarea.

3. Human iRisks

Some iinsurance ipolicies imay iprovide ipartial icoverage ifor ithe icost iof itreatment.

4. Technology iRisks

A ipower ioutage iis iperhaps ithe imost icommon itechnology irisk.

Computers imay ibe ikept iup iand irunning iwith ihigh-performance iback-up ibatteries. iPower isurges imay ioccur iduring ia ilightning istorm i(or irandomly), iso iorganizations ishould ifurnish icritical ibusiness isystems iwith isurge-protection idevices ito iavoid iloss iof idocuments iand idestruction iof iequipment.

5. Strategic iRisks

Strategy irisks iare inot ialtogether iundesirable. iEach iof ithese istrategy-related irisks iis iinherent iin ian iorganization's ibusiness iobjectives.

6. Risk iPrevention

The ibest irisk iinsurance iis iprevention. iPreventing ithe imany irisks ifrom ioccurring iin iyour ibusiness iis ibest iachieved ithrough iemployee itraining, ibackground ichecks, isafety ichecks, iequipment imaintenance iand imaintenance iof ithe iphysical ipremises.

· Fire

· Explosion

· Hazardous imaterials iaccidents ior ithe ioccurrence iof iother iemergencies

Employees imust iknow iwhat ito ido iand iwhere ito iexit ithe ibuilding ior ioffice ispace iin ian iemergency. iA iplan ifor ithe isafety iinspection iof ithe iphysical ipremises iand iequipment ishould ibe ideveloped iand iimplemented iregularly iincluding ithe itraining iand ieducation iof ipersonnel iwhen inecessary. iA iperiodic, istringent ireview iof iall ipotential irisks ishould ibe iconducted. iAny iproblems ishould ibe iimmediately iaddressed. iInsurance icoverage ishould ialso ibe iperiodically ireviewed iand iupgraded ior idowngraded ias ineeded.

Risk iis iinseparable ifrom ireturn. Risk iis iquantifiable iboth iin iabsolute iand iin irelative iterms. iA isolid iunderstanding iof irisk iin iits idifferent iforms ican ihelp iinvestors ito ibetter iunderstand ithe iopportunities, itrade-offs, iand icosts iinvolved iwith idifferent iinvestment iapproaches.

Risk imanagement ioccurs ieverywhere iin ithe irealm iof ifinance. iIt ioccurs iwhen ian iinvestor ibuys iU.S. iTreasury ibonds iover icorporate ibonds, iwhen ia ifund imanager ihedges ihis icurrency iexposure iwith icurrency iderivatives, iand iwhen ia ibank iperforms ia icredit icheck ion ian iindividual ibefore iissuing ia ipersonal iline iof icredit. iStockbrokers iuse ifinancial iinstruments ilike ioptions iand ifutures, iand imoney imanagers iuse istrategies ilike iportfolio idiversification, iasset iallocation iand iposition isizing ito imitigate ior ieffectively imanage irisk.

Risk iManagement iWorks

We itend ito ithink iof i"risk" iin ipredominantly inegative iterms. iHowever, iin ithe iinvestment iworld, irisk iis inecessary iand iinseparable ifrom idesirable iperformance.

A icommon idefinition iof iinvestment irisk iis ia ideviation ifrom ian iexpected ioutcome. iWe ican iexpress ithis ideviation iin iabsolute iterms ior irelative ito isomething ielse, ilike ia imarket ibenchmark.

While ithat ideviation imay ibe ipositive ior inegative, iinvestment iprofessionals igenerally iaccept ithe iidea ithat isuch ideviation iimplies isome idegree iof ithe iintended ioutcome ifor iyour iinvestments. iThus ito iachieve ihigher ireturns ione iexpects ito iaccept ithe imore irisk. iIt iis ialso ia igenerally iaccepted iidea ithat iincreased irisk icomes iin ithe iform iof iincreased ivolatility. iWhile iinvestment iprofessionals iconstantly iseek, iand ioccasionally ifind, iways ito ireduce isuch ivolatility, ithere iis ino iclear iagreement iamong ithem ion ihow ithis iis ibest ito ibe idone.

Methods to manage investment risk

· Use warning while making making an investment selections primarily based totally on worries approximately short-time period profits or losses.

· Review your asset allocation and diversification techniques to make sure your hazard and praise tiers align together along with your long-time period funding goals.

· Dollar-fee averaging might also additionally assist clean out the impact of marketplace volatility through the years and due to the fact it’s completed systematically, can assist dispose of the emotion out of your economic selections.

Asset allocation

Appropriate asset allocation refers back to the manner you weight the investments to your portfolio to try and meet a selected objective — and it could be the unmarried maximum essential issue withinside the fulfillment of your portfolio.

For instance, in case your intention is to pursue growth, and you are inclined to tackle marketplace hazard to attain that intention, you can determine to location as a good deal as 80% of your belongings in shares and as low as 20% in bonds. Before you make a decision how you will divide the asset instructions to your portfolio, ensure you understand your funding time frame and the viable dangers and rewards of every asset elegance.

Portfolio diversification

Asset allocation and portfolio diversification move hand in hand.

Portfolio diversification is the manner of choosing loads of investments inside every asset elegance to assist lessen funding hazard. Diversification throughout asset instructions may additionally assist reduce the effect of fundamental marketplace swings for your portfolio.

Dollar-fee averaging

Dollar-fee averaging is a disciplined funding method which could assist clean out the results of marketplace fluctuations to your portfolio.

With this approach, you observe a selected greenback quantity in the direction of the acquisition of shares, bonds and/or mutual budget on a everyday basis. As a result, you buy extra stocks while fees are low and less stocks while fees are high. Over time, the common fee of your stocks will commonly be decrease than the common fee of these stocks. And due to the fact this method is systematic, it let you keep away from making emotional funding selections.